The labor market flexibility in the US service sector is truly remarkable. During recessions and booms, you can feel the changes in quality and number of waitresses in restaurants, in the size of staffs in shops, in the availability of cleaning services. In the roaring 1990's, it was almost impossible to find qualified restaurant staff to fill vacant jobs. During the stagnant economic years of the Bush administration, such workers were plentiful. In Europe, you simply certainly can't see these differences: waiters, busboys, and cooks all have job security.

[Hans-Werner] Sinn shows that the combined effects of the German tax and social welfare system virtually guarantee that no breadwinner in a family with two children can end up with less than €1,500 a month, even without working at all. This rate is well above, for example, the wage of unskilled labor in the iron and steel industry. In effect, Germany is telling its unskilled not to bother working.

The effects of the social welfare system are especially striking in Eastern Germany, where benefits are at Western German levels, despite lagging far behind in economic development. Sinn estimates that an East German family on welfare can collect four times the average income of a family in Poland and six times the income of a family in Hungary. With such a hurdle to hiring workers, no wonder industry is reluctant to locate in the East and the region is supported by subsidies equal to 45% of its gross product.

For Discussion. What sorts of reforms would be politically acceptable and help solve the incentive problem?

Comments and Sharing

The best program would be a Carrot/Stick approach, where a Minimum support is given, but where 10% more than this Minimum is granted; if the Receiptent can earn a sum equal to the support allotted under the program. Then you set the Minimum at 75% of what Someone can earn at Minimum Wage rates. Loss of Benefits would decrease Dollar for Dollar at past the double Minimum plus 10%. lgl

How did this discussion end up thinking there are too many workers? If Europe demonstrated healthy GDP growth, yet still had high unemployment, you might be able to defend that idea. However, European economies are stagnating, despite a seemingly abundant labor pool. That combo tells us that something other than "too much labor" is the problem. Europe's unemployment problem isn't too much labor, it's too much labor expense combined with government tax and regulation policies that stifle growth and job-creation.

The incentive problem has to have three components:
- make living on the dole (including generous and extended-term unemployment benefits) a lot less attractive than living on full-time wages.
- give companies more labor flexibility. Hiring is very risky, since it easier and cheaper to divorce the average spouse than to lay off the average worker.
- reduce the tax and regulatory hurdles to growth.

European governments, unfortunately, have painted themselves into a very difficult corner by continuing to support the idea that the welfare state can continue forever. I'm afraid there are no solutions that do not involve political risk.

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